Quarterly Report

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

 

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from                      to                     

Commission		Registrant, State of Incorporation,		I.R.S. Employer
File Number		Address and Telephone Number		Identification No.
1-3526		The Southern Company		58-0690070
		(A Delaware Corporation)
		30 Ivan Allen Jr. Boulevard, N.W.
		Atlanta, Georgia 30308
		(404) 506-5000
1-3164		Alabama Power Company		63-0004250
		(An Alabama Corporation)
		600 North 18 th Street
		Birmingham, Alabama 35291
		(205) 257-1000
1-6468		Georgia Power Company		58-0257110
		(A Georgia Corporation)
		241 Ralph McGill Boulevard, N.E.
		Atlanta, Georgia 30308
		(404) 506-6526
0-2429		Gulf Power Company		59-0276810
		(A Florida Corporation)
		One Energy Place
		Pensacola, Florida 32520
		(850) 444-6111
001-11229		Mississippi Power Company		64-0205820
		(A Mississippi Corporation)
		2992 West Beach
		Gulfport, Mississippi 39501
		(228) 864-1211
333-98553		Southern Power Company		58-2598670
		(A Delaware Corporation)
		30 Ivan Allen Jr. Boulevard, N.W.
		Atlanta, Georgia 30308
		(404) 506-5000

      Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes   þ   No   o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  o No þ (Response applicable to all registrants.)

     This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2008

				Page
				Number
DEFINITIONS					5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION					7
PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
		The Southern Company and Subsidiary Companies
		Condensed Consolidated Statements of Income			9
		Condensed Consolidated Statements of Cash Flows			10
		Condensed Consolidated Balance Sheets			11
		Condensed Consolidated Statements of Comprehensive Income			13
		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
		Alabama Power Company
		Condensed Statements of Income			31
		Condensed Statements of Comprehensive Income			31
		Condensed Statements of Cash Flows			32
		Condensed Balance Sheets			33
		Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
		Georgia Power Company
		Condensed Statements of Income			47
		Condensed Statements of Comprehensive Income			47
		Condensed Statements of Cash Flows			48
		Condensed Balance Sheets			49
		Management’s Discussion and Analysis of Financial Condition and Results of Operations			51
		Gulf Power Company
		Condensed Statements of Income			64
		Condensed Statements of Comprehensive Income			64
		Condensed Statements of Cash Flows			65
		Condensed Balance Sheets			66
		Management’s Discussion and Analysis of Financial Condition and Results of Operations			68
		Mississippi Power Company
		Condensed Statements of Income			80
		Condensed Statements of Comprehensive Income			80
		Condensed Statements of Cash Flows			81
		Condensed Balance Sheets			82
		Management’s Discussion and Analysis of Financial Condition and Results of Operations			84
		Southern Power Company and Subsidiary Companies
		Condensed Consolidated Statements of Income			98
		Condensed Consolidated Statements of Comprehensive Income			98
		Condensed Consolidated Statements of Cash Flows			99
		Condensed Consolidated Balance Sheets			100
		Management’s Discussion and Analysis of Financial Condition and Results of Operations			102
		Notes to the Condensed Financial Statements			110
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			29
Item 4.		Controls and Procedures			29
Item 4T.		Controls and Procedures			29

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2008

					Page
					Number
PART II — OTHER INFORMATION
Item 1.		Legal Proceedings				130
Item 1A.		Risk Factors				130
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		Inapplicable
Item 3.		Defaults Upon Senior Securities		Inapplicable
Item 4.		Submission of Matters to a Vote of Security Holders		Inapplicable
Item 5.		Other Information		Inapplicable
Item 6.		Exhibits				131
		Signatures				134

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning the strategic goals for the wholesale business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost recovery, environmental regulations and expenditures, earnings growth, dividend payout ratios, access to sources of capital, projections for postretirement benefit trust contributions, financing activities, completion of construction projects, plans and estimated costs for new generation resources, impacts of adoption of new accounting rules, costs of implementing the IIC settlement with the FERC, cash flow impact of the Economic Stimulus Act of 2008 on tax payments in 2008, unrecognized tax benefits related to leveraged lease transactions, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

•		the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, implementation of the Energy Policy Act of 2005, environmental laws including regulation of water quality and emissions of sulfur, nitrogen, mercury, carbon, soot, or particulate matter and other substances, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
•		current and future litigation, regulatory investigations, proceedings, or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, FERC matters, IRS audits, and Mirant matters;
•		the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;
•		variations in demand for electricity, including those relating to weather, the general economy, population and business growth (and declines), and the effects of energy conservation measures;
•		available sources and costs of fuels;
•		effects of inflation;
•		ability to control costs;
•		investment performance of Southern Company’s employee benefit plans;
•		advances in technology;
•		state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and storm restoration cost recovery;
•		regulatory approvals related to the potential Plant Vogtle expansion, including Georgia PSC and NRC approvals;
•		the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;
•		internal restructuring or other restructuring options that may be pursued;
•		potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;
•		the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;
•		the ability to obtain new short- and long-term contracts with neighboring utilities;
•		the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents;
•		interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;
•		the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;
•		catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts, pandemic health events such as an avian influenza, or other similar occurrences;
•		the direct or indirect effects on Southern Company’s business resulting from incidents similar to the August 2003 power outage in the Northeast;
•		the effect of accounting pronouncements issued periodically by standard setting bodies; and
•		other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed by the registrants from time to time with the SEC.

Each registrant expressly disclaims any obligation to update any forward-looking statements.

THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenues associated with changes in rates and pricing increased in the first quarter 2008 when compared to the same period in 2007 primarily as a result of retail base rate increases at Alabama Power and Georgia Power and an increase in revenues from market-response rates to large commercial and industrial customers.

Revenues attributable to changes in sales growth increased in the first quarter 2008 when compared to the same period in 2007 due to a 1.4% increase in retail KWH sales resulting primarily from a 1.1% increase in customer growth and a 1.3% increase in electricity usage among commercial customers in the first quarter 2008 as compared to the first quarter 2007. For the first quarter 2008, residential KWH sales increased 1.9%, commercial KWH sales increased 1.9%, and industrial KWH sales increased 0.6%.

Revenues resulting from changes in weather were flat due to near normal weather in the first quarters of 2008 and 2007.

Fuel and other cost recovery revenues increased $106.3 million in the first quarter 2008 when compared to the same period in 2007. Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the fuel component of purchased power costs, and do not affect net income.

Wholesale Revenues

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$33.0		6.9

In the first quarter 2008, wholesale revenues were $513.7 million compared to $480.7 million in the same period in 2007. The increase was primarily a result of a rise in fuel revenues due to a 9.6% increase in the average unit cost of fuel per net KWH generated. Also contributing to the increase were higher revenues associated with new and existing wholesale contracts. The first quarter increase was partially offset by lower revenues from short-term opportunity sales. Short-term opportunity sales are made at market-based rates that generally provide a margin above Southern Company’s variable cost to produce the energy.

Other Electric Revenues

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$8.9		7.3

In the first quarter 2008, other electric revenues were $130.2 million compared to $121.3 million in the same period in 2007. The increase was primarily a result of a $3.1 million increase in revenues from co-generation facilities due to higher natural gas prices, an increase in transmission revenues of $2.8 million, and an increase in outdoor lighting revenues of $1.9 million.

Other Revenues

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$(29.5)		(46.8)

In the first quarter 2008, other revenues were $33.4 million compared to $62.9 million in the same period in 2007. The decrease was primarily a result of a $16.5 million decrease in fuel procurement service revenues following a contract termination in February 2007, a $4.7 million decrease in telecommunication service

Fuel and purchased power expenses for the first quarter 2008 were $1.54 billion compared to $1.38 billion for the corresponding period in 2007. The increase in fuel and purchased power expenses was due to a $135.3 million net increase in the average cost of fuel and purchased power, primarily related to a 12.8% increase in the cost of coal per net KWH generated. Also contributing to the increase was a $28.9 million net increase related to total KWHs generated and purchased when compared to the same period in 2007.

Increases in fuel expense at the traditional operating companies are generally offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL – “FERC and State PSC Matters – Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

Details of Southern Company’s cost of generation and purchased power are as follows:

Energy purchases will vary depending on demand for energy within the Southern Company service area, the market cost of available energy as compared to the cost of Southern Company system-generated energy, and the availability of Southern Company system generation.

In the first quarter 2008, other operations and maintenance expenses were $896.8 million compared to $847.4 million in the same period in 2007. The increase in other operations and maintenance expenses was primarily a result of a $28.0 million increase in fossil and hydro expenses due to costs incurred for scheduled outages and maintenance of fossil and hydro generating units; an $11.6 million increase in nuclear expenses due to costs incurred for scheduled outages and maintenance of nuclear generating units; and a $9.3 million increase in customer account expenses largely related to increases in records and collections expenses and meter reading expenses.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Depreciation and Amortization

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$37.6		12.3

In the first quarter 2008, depreciation and amortization was $343.9 million compared to $306.3 million in the same period in 2007. The increase in depreciation and amortization resulted primarily from an increase in plant in service related to environmental, transmission, and distribution projects mainly at Alabama Power and Georgia Power.

Allowance for Equity Funds Used During Construction

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$20.4		101.2

In the first quarter 2008, allowance for equity funds used during construction was $40.6 million compared to $20.2 million in the same period in 2007. The increase was a result of additional investments in environmental projects mainly at Alabama Power and Georgia Power, and generation facilities at Georgia Power.

Equity in Income (Losses) of Unconsolidated Subsidiaries

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$7.0		104.9

In the first quarter 2008, equity in income (losses) of unconsolidated subsidiaries was $0.3 million compared to $(6.7) million for the same period in 2007. The increase in the first quarter 2008 when compared with the same period in 2007 was primarily a result of Southern Company terminating, in December 2007, its investment in synthetic fuel production facilities which had generated operating losses.

Interest Expense, Net of Amounts Capitalized

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$(0.8)		(0.3)

Interest expense, net of amounts capitalized, was $217.1 million in the first quarter 2008 compared to $217.9 million for the corresponding period in 2007. This decrease is primarily the result of $9.7 million related to lower average interest rates on existing variable rate debt and $9.5 million more capitalized interest in the first quarter 2008 compared to the first quarter 2007. These decreases were mostly offset by an $18.4 million increase associated with $795 million in additional debt outstanding at March 31, 2008 compared to March 31, 2007. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Preferred and Preference Dividends of Subsidiaries

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$6.1		59.9

Preferred and preference dividends of subsidiaries were $16.2 million for the first quarter 2008 compared to $10.1 million for the corresponding period in 2007. This increase is primarily related to the issuance of $470 million of preference stock in September and October 2007, partially offset by the redemption of $125 million of preferred stock in January 2008. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Financing Activities” of Southern Company in Item 7 of the Form 10-K and herein for additional information.

Income Taxes

First Quarter 2008 vs. First Quarter 2007
(change in millions)		% change
$22.5		14.5

Income taxes for the first quarter 2008 were $178.1 million compared to $155.6 million for the corresponding period in 2007. The increase was due to higher pre-tax earnings and the unavailability of net synthetic fuel tax credits in the first quarter 2008 compared to the same period in 2007.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the traditional operating companies’ ability to maintain a stable regulatory environment that continues to allow for the recovery of all prudently incurred costs during a time of increasing costs. Other major factors include profitability of the competitive wholesale supply business and federal regulatory policy (including the FERC’s market-based rate proceeding), which may impact Southern Company’s level of participation in this market. Future earnings for the electricity business in the near term will depend, in part, upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth in the service area. In addition, the level of future earnings for the wholesale supply business also depends on numerous factors including creditworthiness of customers, total generating capacity available in the Southeast, and the successful remarketing of capacity as current contracts expire. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form
10-K.

Environmental Matters

Compliance costs related to the Clean Air Act and other environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Eight-Hour Ozone Regulations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information regarding revisions to the eight-hour ozone air quality standard. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and new nonattainment areas within Southern Company’s service territory are expected. The ultimate outcome of this matter cannot be determined at this time and will depend on subsequent legal action and/or future nonattainment designations and regulatory plans.

Carbon Dioxide Litigation

On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the U.S. District Court for the Northern District of California against several electric utilities (including Southern Company), several oil companies, and a coal company. The plaintiffs are the governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The plaintiffs assert claims for public and private nuisance and contend that the defendants have acted in concert and are therefore jointly and severally liable for the plaintiffs’ damages. The suit seeks damages for lost property values and for the cost of relocating the village, which cost is alleged to be $95 million to $400 million. Southern Company believes that these claims are without merit and notes that the complaint cites no statutory or regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information regarding executive orders issued by the Governor of the State of Florida addressing reduction of greenhouse gas emissions within the state. On April 30, 2008, the Florida legislature enacted comprehensive energy-related legislation that includes authorization for the Florida Department of Environmental Protection to adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010 legislative session. This legislation, which has not yet been signed by the Governor, also authorizes the Florida PSC to adopt a renewable portfolio standard for public utilities, subject to legislative ratification. The impact of this legislation on Southern Company will depend on the development, adoption, legislative ratification, implementation, and potential legal challenges in connection with rules governing greenhouse gas emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.

FERC and State PSC Matters

Retail Fuel Cost Recovery

The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Over the past several years, the traditional operating companies have continued to experience higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel costs have resulted in under recovered fuel costs included in the balance sheets of approximately $957 million at March 31, 2008 as compared to $1.1 billion at December 31, 2007. Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes to the billing factors

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

will have no significant effect on Southern Company’s revenues or net income but will affect cash flow. The traditional operating companies continuously monitor the under recovered fuel cost balance in light of these higher fuel costs. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Alabama Power Retail Regulatory Matters” and “Georgia Power Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

In February 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost recovery rate effective June 1, 2008. If approved as filed, total annual fuel billings will increase by $222 million. The Georgia PSC is scheduled to rule on the request May 20, 2008. The ultimate outcome of this matter cannot be determined at this time.

Mississippi Base Load Construction Legislation

In the 2008 regular session of the Mississippi legislature, a bill was introduced to enhance the Mississippi PSC’s authority to facilitate development and construction of base load generation in the State of Mississippi. The bill, passed by the legislature on April 16, 2008 and awaiting approval by the Governor, authorizes, but does not require, the Mississippi PSC to include in retail base rates, prior to and during construction, all or a portion of the prudently incurred pre-construction and construction costs incurred by a utility in constructing a base load electric generating plant. The bill also provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of any such generating plant without the approval of the Mississippi PSC. In the event of cancellation of the construction of the plant without approval of the Mississippi PSC, the bill authorizes the Mississippi PSC to make a public interest determination as to whether and to what extent the utility will be afforded rate recovery for costs incurred in connection with such cancelled generating plant.

Income Tax Matters

Leveraged Lease Transactions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL — “Income Tax Matters — Leveraged Lease Transactions” of Southern Company in Item 7 of the Form 10-K for information regarding pending litigation and proposed legislation related to the sale-in-lease-out (SILO) transactions. Also see Note 1 to the financial statements of Southern Company under “Income and Other Taxes” and Note 5 to the financial statements of Southern Company under “Unrecognized Tax Benefits” in Item 8 of the Form 10-K for information regarding Southern Company’s unrecognized tax benefit related to the SILO litigation. The IRS challenged Southern Company’s deductions related to three international lease transactions in connection with its audits of Southern Company’s 2000 through 2003 tax returns. Southern Company is continuing to pursue resolution of these matters; however, the ultimate outcome cannot now be determined. In accordance with the requirements of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” and FASB Staff Position No. 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” Southern Company will continue to evaluate the SILO transactions and the projected timing of income tax cash flows in light of Southern Company’s pending litigation, other recent court decisions involving lease-in-lease-out  and SILO transactions, and proposed legislation. As a result, it is reasonably possible that the amount of the unrecognized tax benefit could significantly change within the next 12 months. The ultimate impact on Southern Company’s net income and cash flow will be dependent on the outcome of the pending litigation, other court decisions, and proposed legislation, but could be significant, and potentially material.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Bonus Depreciation

On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. Southern Company is currently assessing the financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $120 million and $215 million.

Construction Projects

Integrated Coal Gasification Combined Cycle

As part of the evaluation and screening of alternatives to meet its future generation needs, Mississippi Power is considering the construction of an advanced coal gasification facility to be located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would use an air-blown IGCC technology that generates power from low-rank coals and coals with high moisture or high ash content. These coals, which include lignite, make up approximately half the proven United States and worldwide coal reserves. The feasibility assessment of the project is currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain tax credits available to projects using clean coal technologies under the Energy Policy Act of 2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is dependent upon meeting the certification requirements for the project, including an in-service date no later than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds previously granted to another Southern Company project that would have been located in Orlando, Florida. The Orlando project was cancelled in 2007.

In December 2006, the Mississippi PSC approved Mississippi Power’s request for accounting treatment of the costs associated with Mississippi Power’s generation resource planning, evaluation, and screening activities. The Mississippi PSC gave Mississippi Power the authority to create and recognize a regulatory asset for such costs. In December 2007, Mississippi Power reported to the Mississippi PSC an updated estimate and received an order directing Mississippi Power to continue charging all costs associated with the generation capacity assessment to the regulatory asset. At March 31, 2008, Mississippi Power had spent $25.3 million, of which $2.7 million related to land purchases capitalized. The retail portion of $16.4 million was deferred in other regulatory assets and the wholesale portion of $6.2 million was expensed. The retail portion of these costs will be charged to and remain as a regulatory asset until the Mississippi PSC determines the prudence and ultimate recovery of such costs, which decision is expected by January 2009. The balance of such regulatory asset is included in Mississippi Power’s rate base for retail ratemaking purposes. Approval by various regulatory agencies, including the Mississippi PSC, will also be required if the project proceeds. The Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the Mississippi PSC in the Mississippi base load construction legislation if such legislation is signed by the Governor and if the project proceeds. See “FERC and State PSC Matters – Mississippi Base Load Construction Legislation” herein for additional information.

The final outcome of this matter cannot now be determined.

Nuclear

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction Projects – Nuclear” of Southern Company in Item 7 of the Form 10-K for information regarding the potential expansion of Plant Vogtle.

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities (collectively, Owners), filed an application with the NRC for an early site permit approving two additional nuclear units on the site of Plant Vogtle. In March 2008, Southern Nuclear filed an application with the NRC for a combined construction and operating license (COL) for the new units.

On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).

The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the entire facility with the exception of certain items provided by the Owners. Under the terms of the Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain price escalation and adjustments, adjustments for change orders, and performance bonuses. Each Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia Power’s proportionate share, based on its current ownership interest, is 45.7%. Under the terms of a separate joint development agreement, the Owners must finalize their ownership percentages by July 2, 2008, except for allowed changes, under certain limited circumstances, during the Georgia PSC certification process.

Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in connection with its 2016-2017 baseload capacity request for proposals (RFP). No other responses to the RFP were received. Georgia Power will work with the Georgia PSC’s Independent Evaluator to finalize information required for certification, including updated fossil fuel and generation technology costs, before submitting a final recommendation on August 1, 2008 for the Georgia PSC’s approval. A final certification decision is expected in March 2009.

If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be placed in service in 2016 and 2017, respectively. The total plant value to be placed in service will also include financing costs for each of the Owners, the impacts of inflation on costs, and transmission and other costs that are the responsibility of the Owners. Georgia Power’s proportionate share of the estimated in-service costs, based on its current ownership interest, is approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4 Agreement.

The Owners and the Consortium have agreed to certain liquidated damages upon the Consortium’s failure to comply with the schedule and performance guarantees. The Owners and the Consortium also have agreed to certain bonuses payable to the Consortium for early completion and unit performance. The Consortium’s liability to the Owners for schedule and performance liquidated damages and warranty claims is subject to a cap.

The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or other credit enhancement.

The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Owners will be required to pay certain termination costs and, at certain stages of the work, cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including delays in receipt of the COL or delivery of full notice to proceed, certain Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner insolvency, and certain other events.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Matters

Southern Company is involved in various other matters being litigated, regulatory matters, and certain tax-related issues that could affect future earnings. In addition, Southern Company is subject to certain claims and legal actions arising in the ordinary course of business. Southern Company’s business activities are subject to extensive governmental regulation related to public health and the environment. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as opacity and air and water quality standards, has increased generally throughout the United States. In particular, personal injury claims for damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such current proceedings would have a material adverse effect on Southern Company’s financial statements.

See the Notes to the Condensed Financial Statements herein for discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS — ACCOUNTING POLICIES - “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Leveraged Leases.

New Accounting Standards

Business Combinations

In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), “Business Combinations (SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business combinations, specifically the accounting for contingent consideration, contingencies, acquisition costs, and restructuring costs. Southern Company plans to adopt SFAS No. 141R on January 1, 2009. It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting for any business combinations completed by Southern Company after January 1, 2009.

In December 2007, the FASB issued FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements” (SFAS No. 160). SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements and establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

deconsolidation. Southern Company plans to adopt SFAS No. 160 on January 1, 2009. Southern Company is currently assessing its impact, if any.

FINANCIAL CONDITION AND LIQUIDITY

Overview

Southern Company’s financial condition remained stable at March 31, 2008. Net cash provided from operating activities totaled $520 million for the first quarter 2008 compared to $262 million for the first quarter 2007. The $258 million increase in cash provided from operating activities in the first quarter 2008 is primarily due to a reduction in cash outflow for tax payments of $114 million, a decrease in cash used for compensation earned of $60 million, an increase in non-cash depreciation and amortization of $44 million primarily for new plant in service, an increase in cash inflow from accounts receivable of $27 million primarily related to fuel cost recovery, and an increase of $21 million in net income.

Net cash used for investing activities totaled $995 million for the first quarter 2008, an increase of $207 million over the prior period, primarily due to property additions to utility plant. Net cash provided from financing activities totaled $524 million for the first quarter 2008 compared to $521 million for the first quarter 2007 primarily due to the issuance of new long-term debt.

Significant balance sheet changes for the first three months of the year include an increase in total property, plant, and equipment of $677 million and an increase in long-term debt, excluding amounts due within one year, of $744 million used primarily for the repayment of short-term debt, construction expenditures, and general corporate purposes.

The market price of Southern Company’s common stock at March 31, 2008 was $35.61 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $16.38 per share, representing a market-to-book ratio of 217%, compared to $38.75, $16.23, and 239%, respectively, at the end of 2007. The dividend for the first quarter 2008 was $0.4025 per share compared to $0.3875 per share in the first quarter 2007. In April 2008, the dividend was increased to $0.42 for the dividend payable in June 2008.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for its construction program and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, other purchase commitments, and derivative obligations. Approximately $1.2 billion will be required by March 31, 2009 for maturities of long-term debt. In addition, in connection with Georgia Power’s entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL - “Construction Projects” herein, the revised estimated total construction program for Southern Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. Actual construction costs may vary from these estimates because of changes in such factors as: business conditions; environmental statutes and regulations; nuclear plant regulation; FERC rules and regulations; load projections; the cost and efficiency of construction labor, equipment, and materials; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

placements, or public offerings. The amount and timing of additional equity capital to be raised in 2008, as well as in subsequent years, will be contingent on Southern Company’s investment opportunities. The traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, term loans, and short-term borrowings. However, the amount, type, and timing of any financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.

Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of long-term debt. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs, to meet liquidity needs. At March 31, 2008, Southern Company and its subsidiaries had approximately $249 million of cash and cash equivalents and approximately $4.3 billion of unused credit arrangements with banks, of which $841 million expire in 2008, $185 million expire in 2009, and $3.3 billion expire in 2012. Approximately $79 million of the credit facilities expiring in 2008 allow for the execution of term loans for an additional two-year period, and $530 million contain provisions allowing one-year term loans. See Note 6 to the financial statements of Southern Company under “Bank Credit Arrangements” in Item 8 of the Form 10-K for additional information. The traditional operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the traditional operating companies. At March 31, 2008, the Southern Company system had outstanding commercial paper of $1.0 billion and short-term bank notes of $150 million. Management believes that the need for working capital can be adequately met by utilizing commercial paper programs and lines of credit without maintaining large cash balances.

Off-Balance Sheet Financing Arrangements

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Off-Balance Sheet Financing Arrangements” of Southern Company in Item 7 and Note 7 to the financial statements of Southern Company under “Operating Leases” in Item 8 of the Form 10-K for information related to Mississippi Power’s lease of a combined cycle generating facility at Plant Daniel.

Credit Rating Risk

Southern Company does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and sales. At March 31, 2008, the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9 million and at a BBB- or Baa3 rating were approximately $298 million. At March 31, 2008, the maximum potential collateral requirements at a rating below BBB- or Baa3 were approximately $1.0 billion. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.

Southern Company’s operating subsidiaries are also party to certain agreements that could require collateral and/or accelerated payment in the event of a credit rating change to below investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and power price risk management activities. At March 31, 2008, Southern Company’s total exposure to these types of agreements was approximately $47 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Market Price Risk

Southern Company’s market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2007 reporting period. In addition, Southern Company is not aware of any facts or circumstances that would significantly affect such exposures in the near term.

Due to cost-based rate regulation, the traditional operating companies have limited exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, into financial hedge contracts for natural gas purchases. The traditional operating companies have implemented fuel-hedging programs at the instruction of their respective state PSCs.

The changes in fair value of energy-related derivative contracts and valuations at March 31, 2008 were as follows:

Gains and losses on energy-related derivative contracts related to the traditional operating companies’ fuel hedging programs are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through the fuel cost recovery clauses. In addition, gains and losses on energy-related derivatives used by Southern Power to hedge anticipated purchases and sales are initially deferred in other comprehensive income before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

The fair value gain/(loss) of energy-related derivative contracts outstanding at March 31, 2008 was reflected in the financial statements as follows:

Unrealized pre-tax losses recognized in income for the three months ended March 31, 2008 for energy-related derivative contracts that are not hedges were $14.0 million and were immaterial for the three months ended March 31, 2007.

As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value measurements and related disclosures, the table above now uses the three-tier fair value hierarchy, as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously used descriptions “actively quoted,” “external sources,” and “models and other methods.” The three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the previous descriptions focused on the source of the inputs. Because Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are actively quoted, the valuations of those contracts now appear in Level 2; previously they were shown as “actively quoted.”

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Southern Company in Item 7 and Notes 1 and 6 to the financial statements of Southern Company under “Financial Instruments” in Item 8 of the Form 10-K and Note (F) to the Condensed Financial Statements herein.

Financing Activities

In the first three months of 2008, Southern Company’s subsidiaries issued $550 million of senior notes, and Southern Company issued $132 million of common stock through the Southern Investment Plan and employee and director stock plans. In addition, Georgia Power and Mississippi Power entered into long-term bank loans of $300 million and $80 million, respectively. The proceeds were primarily used to repay short-term indebtedness and to fund ongoing construction projects. See Southern Company’s Condensed Consolidated Statements of Cash Flows herein for further details on financing activities during the first three months of 2008. During the first quarter 2008, interest rate hedges of $225 million notional amount were settled at a loss of $15.8 million related to the issuances. These losses were deferred in other comprehensive income and will be amortized to income over the original term of the hedges. See Note (F) to the Condensed Financial Statements herein for further details. Also during the first three months of 2008, Southern Company and its subsidiaries paid at maturity $5 million of long-term debt and also redeemed $125 million of preferred stock. Subsequent to March 31, 2008, Gulf Power entered into a $110 million long-term bank loan, of which $80 million was borrowed in April 2008 and $30 million is to be borrowed in June 2008, and settled an interest rate hedge with an $80 million notional amount at a loss of $5.2 million.

During the first three months of 2008, Southern Company and its subsidiaries entered into additional derivative transactions designed to hedge interest rate risk related to variable rate obligations. The total notional amount of these derivatives is $1.2 billion.

Also in 2008, Southern Company’s subsidiaries converted their entire $1.2 billion of obligations related to auction rate tax-exempt securities from an auction rate mode to other interest rate modes. Approximately

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$696 million of the auction rate tax-exempt securities were converted to fixed interest rate modes and approximately $553 million were converted to a daily floating rate mode.

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

PART I

ALABAMA POWER COMPANY

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.